BY: FAZAAD BACCHUS
In the last issue, we talked about retirement income and making sure that one does not outlive their retirement income
Today we will look at three more options available to you.
- Upon receiving your lump sum from your employer, it will be in the form of a Locked-In Retirement plan (LIRA). The main reason it is LIRA is the fact that your employer contributed part of the investment and wants to make sure that the money is used for your retirement if not then many would be tempted to spend as much of it as possible and possibly run out of money at an early time. At a chosen retirement date your LIRA can be converted to a Life Income Fund (LIF) which has a minimum and a maximum withdrawal every month or year. A LIF does not guarantee a lifetime income as the investment is subject to what happens in the market, so if the market falls, so too could your money. Also, if you withdraw the maximum amount every month you will soon have very little left.
- Another option is split your LIRA where 50% would be converted into an RRSP. Why would you do that you might ask? Well here is your answer; an RRSP does not have a minimum or maximum amount that you can withdraw in any given year. You will have to pay taxes on whatever you withdraw, but there are no limitations on the amount. So, let’s say for example you retire and need some extra money to enjoy the first few years of retirement, this would be a source that you can now utilize. Be careful not to use all, but at least now you do have access to 50% of your LIRA. The other 50% which was left in the LIRA will now be converted into a LIF and that will provide you with a monthly income.
- So far, if you noticed there are no guarantees in any of the previous options.
So, let me take you to a guarantee: You can use all or part of your money to buy an annuity. An annuity is a series of payments which you will receive for as long as you live. The way it works is that you hand over your investments to an insurance company and they are now responsible for the investment growth. This means that you will never ever run out of money no matter what the market does. This action provides great peace of mind but does have certain drawbacks for example, what if you need to access some of your money for an emergency? Well in an annuity, no extra money is available, only your monthly payments, so you have to cater for extra elsewhere. Another major drawback would be if you were to die soon after start receiving payments and there was no spouse to receive the lifetime benefit. The annuity will pay to your beneficiaries for a specified time but it may never amount to the money you have invested.
Retirement planning is pretty complex and by yourself, you may not know what the best solution is. Next week we will look at my favourite option when it comes to retirement planning. In the meantime, if you have any questions, feel free to drop me a line.